Digitalization and predictability in the BRICS countries: what can be learned from information about the dynamics of stock prices

Abstract

The study aims to identify the impact of digitalization on predictability in the BRICS countries’ stock markets. It is based on an analysis of the dynamics of stock markets volatility during the 1990-2023 period. The paper seeks to prove that the standard deviation of stock returns is determined by the volume of incoming new information, and higher volatility of returns indicates lower predictability. Digitalization may cause a reduction in uncertainty as it uses more data, improves their quality and develops data analysis methods. On the other hand, digitalization may lead to increased uncertainty due to the emergence and development of new industries, in which it is more difficult to predict cash flows in comparison with traditional industries because of increased complexity of supply chains and technologies. Based on quantitative analysis, it has been revealed that digitalization has led to a statistically significant decrease in the volatility of stock markets in the BRICS countries. In 2015-2023, relative to the period of the 1990s-2006, volatility in Russia decreased by 1 percentage point, in India by 0.4–0.5 percentage points, in China by 0.8 percentage points, in the UAE (Dubai) by 0.5-0.7 percentage points. Statistically insignificant decreases in volatility were observed in Brazil and South Africa. In the developed capital markets, the decrease in volatility between these two periods was also statistically insignificant, amounting to less than 0.1 percentage points. These findings may indicate that the processes of digitalization in the BRICS countries contributed to an accelerated increase in predictability thanks to an increase in the volume and quality of information and the emergence of new methods of analysis. At the same time, part of the decrease in volatility may be explained by further development and improved efficiency of capital markets. The joint influence of these effects on the complexity of forecasting turned out to be more significant than the impact of innovative technologies and new industries.